Elsee, Inc., has net sales of $10 million, and 75 percent of these are credit sa

Question

Elsee, Inc., has net sales of $10 million, and 75 percent of these are credit sales. Its cost of goods sold is 65 percent of annual net sales. The firm’s cash conversion cycle is 32.0 days. The inventory balance at the firm is $1,543,000, while its accounts payable balance is $1,858,000. What is the firm’s accounts receivable balance? (Use 365 days for calculation. Round intermediate calculations to 1 decimal place, e.g. 15.1. and final answer to the nearest whole dollar, e.g. 5,275.) Accounts receivable $_________

Explanation / Answer

Revenue = $10 million; Cost of Goods Sold(COGS)= 65%* Revenue = $ 6.5 million;

Inventory Balance= $1,543,000; Account Payable Balance= $1,858,000; Cash Conversion Cycle, CCC= 32 days

Now CCC= Days Inventory Outstanding(DIO) + Days Sales Outstanding(DSO) - Days Payable Outstanding(DPO)

DIO= Average inventory/COGS per day = 1,543,000/(6,500,000/365) = 86.64 days

DPO= Average AP/COGS per day = 1,858,000/(6,500,000/365) = 104.33 days

So from here we can calculate DSO = 32-86.64 + 104.33 = 49.69 days

Now DSO = Average Account Receivable/COGS per day

So Average Account Receivable Balance = 49.69 * (6,500,000/365) = 884,890.

This average Account receivable balance factors in cash sales as well which decreases its amount

So Account Receivable * 75%(%age of credit sales) = Average Account Receivable Balance

Therefore Account Receivable Balance = 884,890/75% = $ 1,179,853

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